What are the differences between crypto futures and forex? Cryptocurrencies have created a lot of buzz in the financial market over the past few years, so much so that several investors and traders wonder whether or not they should consider focusing on the crypto markets instead of the forex markets.
They are always on the lookout to find out the ways in which they can get the best of both worlds.
If you too are one of those investors, you should first know the differences between the two along with the similarities and then make a final decision.
This article explains the differences between crypto and forex futures in the best way possible so that it is easy for you to understand and choose one between these two asset classes.
However, if you look at the core of the matter, you will see that these two options are all about different perspectives of looking at money and investments.
One is old and traditional while the other is new. If you can learn about both these types, you will be able to create real and more buying power in your day-to-day life.
Typically, when you deal with forex you will need to have some particular skill and knowledge.
However, this kind of trading is much more stable than crypto futures trading but, sadly, it offers much less profitability as compared to cryptocurrencies apart from the fact that it takes a lot more time and knowledge about the initial information.
Apart from these differences, there are several others that you will come to know about in this article.
11 Differences Between Crypto Futures and Forex
Forex and cryptocurrencies do have some similarities and differences both being decentralized and volatile in nature but to varying degrees.
Though volatility is a plus, you should get the algorithms right when you trade with crypto futures or forex to make a profit out of the opportunities that they both offer.
You will also need to have a clear plan and follow a conservative trading strategy since volatility is a double-edged sword.
Your analysis and strategy are two important factors to limit the risk of loss and for that, you should know the differences between them in the first place.
This will help you to pick up the right signals and go ahead to make profits. Here they are for you.
1. Market Size
Considering the trading volume, the forex market is leading the financial market scenario in the world, and that too by a considerably wide margin.
According to a report of The Bank for International Settlements, the average market size of forex is about $6.6 trillion in terms of daily trading value.
On the other hand, the collective market cap for the crypto on the whole totaled to about $256 billion.
2. Volatility and Liquidity
The smaller market size of the crypto indicates that the crypto futures market is much more volatile in comparison to the forex market. This means that it is riskier for the investors.
Just like it can provide a huge upside, it can also result in irrecoverable and crippling losses. Higher volatility also indicates less ease in trading or liquidity. This is because people prefer to trade in much smoother marketplaces.
On the other hand, the forex market offers low volatility and high liquidity. This means that it is much more able to sustain any economic shocks as it may come in the way.
This will benefit both the investor and a non-investor since the currencies will be far more stable even during bad economic conditions.
3. Anonymity
The best part of the crypto transaction is that it allows the traders and investors to remain anonymous.
Though major crypto coins such as Bitcoin and Ethereum have limited ability to hide identities due to government intervention, the smaller coins like Zcash, Monero, and Verge still retain this attribute.
On the other hand, forex transactions are regulated strictly by a tight web of financial professionals and forex brokers.
They are known as the interbank market. This market has incorporated the Know Your Customer or KYC standard since 2014. According to this standard, participants need to furnish all personal information if they wish to access an exchange.
However, there are a few forex traders that ignore this rule spurred on by the anonymous structure of the crypto futures market.
4. Advantages
The most significant advantage of considering crypto futures is that you will be able to maintain anonymity and have comparatively low barriers to entry.
In addition to that, the growth potential in this specific type of investment is pretty high and the transaction costs are also pretty low.
As for the forex scenario, it is safer than crypto and offers more stability and liquidity.
There are also a few measures in place to protect the investors against thefts and frauds due to the strict KYC standard which means that there is a much lower chance to incur a massive loss in forex trading.
5. Disadvantages
As for the downsides of crypto futures trading, in spite of the increasing acceptance of crypto into mainstream society, there is no government regulation or insurance on and for the accounts.
The marketplace is also quite insecure with a higher probability of frauds, scams, and currency defaults. Also, the low level of liquidity as well as a few errors that exist in the underlying technology in crypto can also affect the entire market quite drastically.
On the other hand, the disadvantage of the forex market is that you will not be able to make huge gains in a short term and whatever you gain can be tracked and taxed easily.
The barriers to entry are much higher in comparison to the crypto futures market and you may even have to pay higher middleman costs and fees depending on the broker you choose.
Most importantly, in case of any unexpected political events the market can be affected dramatically resulting in major losses.
6. Capital Requirement
The intermediaries in the forex world are everywhere and they charge fees for each transaction. There may also be hidden costs that will make such trades quite expensive.
This means that you will need to have a significant amount of capital in hand before you start to deal with forex.
On the other hand, the capital requirement in the case of crypto futures is not as high as compared to forex.
7. Available Instruments
There is a significant difference in the number of available instruments in both these scenarios as well.
For example, in forex you will typically get trading pairs to deal with such as EUR/USD, USD/CHF, USD/CAD, USD/JPY, GBP/USD, AUD/USD, and NZD/USD.
You may also get to deal with some exotic currency pairs, if you are interested, which consists of a currency of a developing economy like Mexico or South Africa and a major currency.
On the other hand, there are tens of thousands of crypto coins that you can deal with and the number keeps on growing with each passing day.
A few of these coins are actively traded by most people but there are several other different types of crypto coins that are known only to the hard-core enthusiasts.
With such a large number of crypto coins available to trade, the crypto market seldom experiences a period of calm as forex which can last for days and even weeks.
8. Profit Potential
You can make an outsized profit by dealing with crypto and crypto futures. This is one of the significant aspects for which crypto markets have gained such a huge popularity.
However, this also increases the risks associated with it and therefore you should be ready to take on bigger risks while trading crypto futures.
In fact, there are lots of incidents when a particular crypto asset failed to perform well and the value of it drifted to zero or the capital flowed into the more established coins.
On the other hand, there is a lower amount of such risks in forex because you can significantly enhance your profit potential by using an appropriate amount of leverage for your trades.
9. Market Hours
If you consider the crypto and forex markets to trade your futures, it is more convenient in the case of the crypto market since it is open all around the clock for 365 days.
However, in contrast, the forex market is open 24/5 which means that you can enjoy your weekends while dealing with forex but you may miss out on the big moves that may happen during the weekend.
Moreover, the activity of the forex market is primarily driven by the big institutions which, typically, are not in the case of crypto.
It is primarily driven by small crypto exchanges and investment firms and the bigger institutions have just started to take interest in this particular field.
10. Viewpoints of Regulators
The regulators have different viewpoints for crypto futures and forex. Cryptocurrencies, on the whole, are viewed as an asset class that has grown at a rapid pace and is considered to be a commodity.
The US Commodity Futures Trading Commission or CFTC, therefore, imposes regulation on it when it is used as a derivatives contract via its Commodity Exchange Act. Some other notable facts in this regard are:
- The Internal Revenue Service or IRS treats this as capital assets and therefore levies capital gain and loss taxes.
- The Securities and Exchange Commission or SEC reserves the right to take actions against any unregistered Initial Coin Offerings, commonly known as ICOs.
- The Federal Deposit Insurance Corporation or FDIC needs information on these assets and does not allow member banks to insure crypto deposits.
- The Securities Investor Protection Corporation or SIPC does not consider it to be a security and therefore does not offer protection as per the Securities Investor Protection Act, section 78lll(14).
On the other hand, just like traditional currencies, forex meets a much higher regulatory standard and is therefore classified as securities as well and not only as commodities.
11. Security
Finally, if you consider the security aspect of the two markets, the crypto markets are less secure since these markets are still in their early stages of development and lack appropriate regulations.
Though a few regulations are placed in a few developed countries, crypto future traders need to take on counterparty risks as well as hacking risks.
On the other hand, the forex market is more secure and therefore the traders experience fewer risks. Since these markets are heavily regulated there are very little or no scams reported against the forex trading industry.
Still, you are advised to find out about the broker and choose a reliable one before you start trading.
Which is Better – Crypto Futures or Forex?
In spite of the few similarities that both crypto and forex markets share, there are a few differences in the risk-reward dynamics.
And, since these are unique for each, it is pretty difficult to say one is better than the other.
Therefore, you will be better off if you talk to a financial advisor to know which among crypto futures and forex will be a better option for you to choose based on your trading preferences and lifestyle.
If you want a more liquid market that will provide a reasonable and smooth return for your patience, then you should go for forex trading.
This will offer you both long term as well as short term opportunities and allow using high leverage options.
With the use of both fundamental and technical analysis you will have a much better insight into the upcoming moves and the best part of it is that for that, you will not need to spend a lot of time researching.
On the other hand, if you want significant growth in your portfolio in a short time then you should go for crypto futures trading.
This is a good choice for those people who are okay with brief technical analysis and do not need valuable fundamental indicators.
Moreover, you should be okay with significant and unexpected price movements that may generate massive profits and considerable losses rapidly.
However, keep in mind that you should not speculate on any market, especially the crypto market, with the money that you do not want to lose.
Ideally, you should make your choice based on the liquidity and volatility offered by the markets instead of profitability alone.
And, in that case, choosing forex is much better than choosing crypto futures.
Here are a few similarities between crypto futures and forex that you should also consider in order to make a perfect and more accurate comparison.
- Both these markets are driven by the same fundamentals of economics – the demand and supply balance. This means in both the markets, the prices of the products rise when there are more buyers and fall when they are fewer in number.
- You will get to use almost familiar chart patterns and indicators while trading in both these markets. They play together holding the value relative to each other.
- Both these markets are decentralized, meaning there are no central regulations in it no matter how well named a forex exchange is. However, this does not mean that the forex market is as unstable as crypto.
- Both the markets follow similar money physics basically which regulates the movements according to the basic demand and supply effect. News of market absorption will result in market shocks to both crypto and forex markets though to varying degrees.
Now based on the differences and similarities between the two, here are a few tips that will also help you make the right choice when followed.
No matter which form of trading you choose, make sure that you start with smaller lot sizes. This will allow you to see how well it suits you.
Though the current trend is trading crypto coins and futures, invest wisely in it or in forex.
Also, give proper attention to both, and in that sense, forex may need some more attention.
If you are a starter and know the type of trader you are, it will be easier for you to go with major currencies as it will be easier to predict them as compared to crypto futures.
However, forex trading is not like a hit-or-miss type of trading as it is crypto and therefore you will need some skills and knowledge in this field.
Also, forex is much more stable than crypto. You must keep in mind while trading with crypto futures that it can disappear instantly because crypto is basically dependent on the public opinion.
Therefore, if no one is interested in a particular coin it may drift to zero value and become worthless.
This, however, will not happen when you deal with forex such as YEN, GBP, EUR, or other currencies of the real world, otherwise, the economy of the world would fail.
This, needless to say, translates to the security of trading with forex which is much more as compared to the crypto futures.
On the other hand, if you are dealing with crypto coins or crypto futures, you will need to spend hours on research and even lose your money because it is a complicated process, more than it may look at first glance.
Another significant advantage of dealing with forex is the deposit insurance that will safeguard the money you have put in your account.
But in comparison, crypto is not as protected because there are a lot of hackers out there.
You can lose all your money in the blink of an eye even for other reasons such as technical glitches, issues with the internet, data losses, and breaches.
If you do, there is no one to fall back on to get your money back.
However, this does not mean that forex is free from any disadvantages.
One significant downside of forex is that it is prone to inflation while cryptocurrencies are not.
It is also not as profitable as crypto futures trading can be which is why crypto is more appealing to investors all over the world.
It is much easier to get involved in forex than crypto futures trading because it is user friendly and you will not need to practice a lot even if you are a rookie to start with it.
You will get a lot of tutorials on the internet about it because it has been in the market for a much longer time than crypto.
Still, you will need to know about specific tools to use in forex trading such as stop-loss to prevent losing your money.
Remember, it is simple but it is certainly not magical and does not work on its own.
You will need to put in your personal input and experience into it to minimize losses.
Therefore, putting everything in a nutshell, it can be said that:
- You should choose between crypto futures and forex trading based on your financial goals, trading style, available capital, and lifestyle demands.
- If you are a beginner, it is better to start small and increase your bets once you know which of the two suits your needs the best.
And, also check out the major differences between them, which once again, can be summarized as follows:
- Trading cost in crypto is lower than forex
- Forex market is not open on weekends as the crypto market is
- High volatility of crypto can result in a price change by as much as 1000% or even more which is unlikely in the case of forex
- The factors that may lead to a price change in crypto are unpredictable while that of the forex can be predicted beforehand and
- Forex is suitable for OTC trading while crypto allows making anonymous trades.
Therefore, your final choice will depend on your needs and preferences.
It is for this reason you should research well because if you want to deal with lesser known crypto coins, you will need to dive deep into the basics.
And, consult an expert financial advisor before you make your choice as well.
The advisors will help you to choose the products as well that you want to invest in, especially in the case of crypto because with such a huge number of them existing in the market, it may be impossible to keep a track of all of them.
That is why you will need to create and work with a limited watchlist.
Conclusion
You will know about the differences between crypto futures and forex along with the way each of these markets works when you go through articles like this. It will help you in building a much better strategy regardless of the option you choose.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.
